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Buy SunTrust Now: Deutsche Bank

Mortgage servicing assets are written down when long-term rates decline, since the likelihood of refinancing -- and a loss of servicing fees on the paid-off loans -- rises. When rates rise, the opposite happens.

O'Connor also estimates SunTrust will lay off roughly 900 staffers working on nonperforming loans and repossessed assets, for annual savings of roughly $150 million, "driving our higher EPS estimates."

SunTrust reported a second-quarter efficiency ratio of 66.56%, improving from 68.83% a year earlier. The efficiency ratio is, essentially, the number of pennies of overhead for each dollar of revenue. During the company's second-quarter conference call in July, SunTrust CFO Aleem Gillani said "We remain committed to achieving an approximate 65% efficiency ratio in 2013 and to our long-term target of below 60%."

O'Connor estimates that the long-term expense decline as the housing market recovers "is worth $150m [annually] or $0.20 per share and is not reflected in consensus estimates."

SunTrust's shares closed at $32.55 Thursday. The shares have returned 16% this year, following a return of 62% during 2012. The shares trade for 1.25 times their reported June 30 tangible book value of $26.08, and for 11 times the consensus 2014 EPS estimate of $2.97, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $3.32.

STI Chart STI data by YCharts

Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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